Lew Sichelman
Cash is king when it comes to buying a house. Always has been, and always will be. And these days, individual cash buyers – as opposed to cash-laden investors – have an even better shot of scoring the house of their dreams.
The share of investors currently trolling the resale market is at its lowest point since 2008, according to a report from the National Association of Realtors. And the National Association of Home Builders says all-cash sales in the new-home sector have also been trending lower.
Consequently, individual buyers now face less competition from investors – and paying with cash gives them a leg up on buyers who must use financing.
What Sellers Love
Sellers like it when there is no mortgage involved: For one thing, cash allows for a quicker closing. An appraisal is not required, and no lender means there will be no lender-caused delays. All in all, there is less risk of something derailing a cash transaction on the way to settlement.
But there are downsides. Do you really want to empty your piggy bank, close out your retirement accounts and unload all your stocks and bonds, just to have all those assets tied up in a house?
You might, if there was a way to get your cash back in relatively short order. And that’s possible with a technique known as delayed financing.
Delayed financing isn’t a kind of mortgage. Rather, it is a method for refinancing a cash purchase right after closing. Normally, homebuyers have to wait at least six months to pull money out of their deals. But with delayed financing, there is no waiting period.
The technique is particularly helpful in competitive markets in which bidding wars are common. Unfortunately, “not many people know about this program, and even fewer are using it,” says agent John Meussner of Fair Oaks, California.
When he posted about it on the ActiveRain real estate site in 2014, the response was “tremendous,” Meussner reported.
“Comments like, ‘My lender didn’t know what I was talking about when I asked him about delayed financing’ were common,” he wrote in a follow-up post.
There are plenty of reasons you might want to retrieve some money out of your purchase. One is that houses are illiquid assets: It often takes months to buy and sell them – unlike, say, stocks, which can be traded in seconds. Also, the money you used to buy your house cannot be used to make other investments. That goes against the adage that it’s wisest to diversify your holdings – to spread your money among different types of assets.
All-cash purchases also violate another basic investment tenant, which says it’s best to invest with borrowed money, putting less of your own cash at risk.
Rules for Delayed Financing
Delayed financing pushes aside all these drawbacks. But as always, there are rules.
First and foremost, the refinanced mortgage has to be purchased from your lender by secondary market entity Fannie Mae. Check with your lender first to make sure that’s the case.
Next, while there is no six-month wait to refinance, there is a six-month window in which you must do so. The window opens the day you close on your house and stays open for 180 days thereafter. If you miss the deadline, the opportunity is lost.
Refi now or later – what’s the difference? In a regular refinance, the loan amount usually cannot exceed 80 percent of the home’s value. But in a delayed financing, the loan amount can go up to the actual amount of your original investment in the property, as documented by the HUD-1 settlement statement – plus whatever closing costs, prepaid fees and points you paid at that time.
That total, though, is subject to the loan-to-value ratio set for your new mortgage. And the loan amount cannot exceed Fannie Mae’s maximum loan limit, which changes yearly. Currently, that limit is $766,550 in most places, and about $1.15 million in high-cost markets.
No Renovation Costs
Only your acquisition and closing costs can be financed under the delayed financing exception. Any costs incurred to renovate the property cannot be included. If you want to recoup those costs, as well as some of your original outlay, you’ll have to wait six months and apply for a standard cash-out refinance.
The purchase must have been an arm’s-length transaction in which the buyer and seller both acted in their own individual interests.
The source of funds for your cash deal must be documented with bank statements, personal loan documents or a loan on another property you own. Any loans, including home equity lines of credit, used as a source of money for the purchase must be repaid from the proceeds from the delayed financing exception.
Gift funds can be used as a source of cash. But if the money Mom and Dad gave you must be repaid, it is not a gift; rather, it is a loan that must also be repaid from the delayed refi proceeds.
There can be no outstanding liens on the property, so make sure your taxes, insurance and homeowners association dues are paid up.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
